Considering a Sale of One of Your Investment Properties in Greater Cleveland Ohio?
As we have covered in many earlier posts, there can be plenty of reasons for wanting to sell your rental(s). If you do decide to sell, you need to be aware of the tax implications when selling rental property. There’s a lot to know. Let’s get started.
The sale of investment property requires considering the tax implications when selling rental property. Make sure before making the final decision to sell your rental property that this is what you want to do. Dealing with the tax matters can be complicated and using appropriate services can get pricey.
If you want to sell a rental property, with or without tenants, learn all of your options first. Selling to a cash buyer is a lot easier than listing your rental with an agent. Selling to a cash home buyer means you don’t have to deal with any of the complications that tenants present.
Before we start, please note: The information presented in this article is for educational purposes only and should not be considered tax law, legal, financial, or as any other type of advice.
Tax Rules When Selling Rental Property
The first thing you are going to want to become familiar with is the tax implications when selling rental property. This is going to involve capital gains or capital losses depending on what you bought the property for and what you are selling it for.
The taxes when selling rental property are going to include taxes at both the Federal and State level.
The difference between the sale price and the adjusted tax basis determines capital gains.
A rental property tax calculator can help you determine this if you know what the property is selling for or help estimate your taxes if you are just considering it.
Capital gains can pertain to either short-term or long-term gains. This helps to determine what your tax obligations will be for selling the rental property.
Sometimes individuals purchase rental property and discover it’s not for them. Then they want to sell it within the year. This period of time is considered short-term. If the property is sold at a profit then it would be taxed as short-term capital gains. Usually, this is taxed at the standard income tax rate.
Property held for longer than one year is subjected to a different tax rate. This is a long-term capital gain. The rate can range between 0% to 20% but most often falls around the 15% mark (to be sure we recommend you talk with the appropriate tax professional). Again you can use a selling rental property tax calculator to help you estimate the tax implications when selling a rental property.
Selling rental property tax expenses looks at the basis of the rental property. The basis is usually the amount that you paid for the property when purchased.
Additional expenses that you incurred to make the sale will also be taken into account. If events occurred that decreased the value then you can likewise decrease the basis amount. At the same time if you improved the property then you can add the value of these improvements to the basis.
There are some advantages to an increased basis as it can help to reduce the amount of taxes you will need to pay. At the same time, you can enjoy an increased tax deduction with a capital loss.
Possible Tax Deductions When Selling Rental Property
Pay close attention to rental property tax deductions when you are going to sell. You will still have your regular tax deductions for this property up until the time that you sell it.
It may be that when you are selling the property you are not going to realize a profit. This is going to put you into a capital loss situation.
You will be limited as to the amount you can deduct for this loss. You will be able to carry the loss forward for a specific number of years. Just as there are short-term and long-term capital gains the same applies for capital losses.
Owning the property for less than one year constitutes a short-term loss. Whereas longer than one year is a long-term loss. You will need to look at the current year’s allowable deduction limit for the capital loss to understand it better.
You may also be able to qualify for passive losses. These could be included with your selling rental property tax deductions.
Passive losses occur when your property losses in a given year exceed the rental income. There is a cap on as to how much you can claim each year, but these losses may be able to be carried forward. When you sell the property you can apply any of these unused losses that occurred during the sale year.
One advantage you may want to take advantage of is selling your investment property and buying another using what is called a 1031 tax exchange.
It would have to be in the same category as an investment property. This applies to the 1031 tax rule. It can be complicated so you would want to rely on professional advice regarding this.
Some individuals sell their investment property so they can pay down their primary residence mortgage. This can create some substantial tax liabilities.
Tax Implications When Selling Rental Property
Researching your tax obligations when selling your rental property involves becoming aware of the tax law. This includes knowing the tax consequences that affect tax implications when selling rental property.
Property depreciates and the IRS realizes this so they have rules in place. This pertains to how the calculations are handled for your depreciation deduction. Basically, the rules are that depreciation applies over a 27.5 year period. So each year a portion of this can be used as a deduction against the profit you are making. It works out to 3.636% per year. Improvements have to be calculated into the depreciation formula.
If you have been claiming depreciation you may be subjected to depreciation recapture tax.
Another area that includes potential tax consequences of selling a rental property is incurring the new Net Investment Income Tax. Who is subject to this is included in the link in the prior sentence.
If this applies to you then you may have to pay an additional 3.8% on your net investment income. This is applicable to specific thresholds and deals with capital gains. To see if you are affected by this click the link here.
Being as this is not your principal residence you are not eligible for the capital gain exclusion. Which usually amounts to $250,000/$500,000.
Selling Rental Property Taxes Implications Summary
If you are selling a rental property you must be familiar with the various tax laws that affect you. This excercise is so you don’t make any mistakes when determining what your profit will be after taxes.
You will most probably want to use the services of an accountant to assist you with this. As a very rough start you can use the selling rental property tax calculator. This will give you a good idea as to what your selling rental property tax figures will look like. If you are really familiar with the tax laws and tax implications when selling rental property, you can use tax accounting software yourself to help you file your taxes pertaining to your rental property sale. Again, we recommend you work with a tax professional.